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BP's Weak Q1 Doesn't Impair the Long-Term Story

Morningstar equity analyst see the first-quarter results as short-term noise and not a reflection of BP's long-term recovery

Stephen Simko, CFA 2 May, 2012 | 6:18PM

Although BP's (BP.) first-quarter results were somewhat weak, our first take is that this is simply short-term noise and does not reflect the company's long-term recovery story. To us, the road to recovery for BP is still on track, although it's a road filled with uncertainty (relating to the ultimate cost of fines and lawsuits) and no or negative growth (due to asset sales). Our fair value estimate is unchanged.

Pretax profits were $7.4 billion, slightly up from last quarter but down sharply from the $9.2 billion generated a year ago. The biggest driver was the continued weakness in the downstream segment, where pretax profit of $924 million was down roughly $1.3 billion year over year. Though refining margins are likely to begin strengthening this quarter, BP's petrochemical operations are still suffering from high feedstock costs and poor geographic positioning. As a result, downstream results could remain underwhelming for a while to come.

BP's upstream segment showed a slight decline in profits, largely due to oil production falling to 1.25 million barrels per day from 1.4 million b/d a year ago (excluding TNK-BP, whose production was flat). But new projects coming online during 2012-13 in Angola and the North Sea as well as a bounce-back in Gulf of Mexico volumes (though not until 2013) mean that production volumes are likely to begin stabilizing later this year.

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About Author

Stephen Simko, CFA  is a senior stock analyst at Morningstar.